Jason Corcoran
30 July 2007
Booming demand for credit brings in multi-nationals
A consumer lending frenzy has gripped Russia with the resulting boom in mortgages, credit cards and consumer loans fuelling a mergers and acquisitions scramble in financial services.
Consumer lending had shot up to $80bn (€58bn) by the end of last year, from $20bn in 2004, according to Alfa Bank. Advertisements for “fast and easy credit” and “credit in 20 minutes” are plastered over Moscow’s Metro and in the city’s newspapers.
Mortgages total 0.9% of Russian’s GDP and other housing loans represent 1.4%. Moscow brokerage Aton Capital estimates 100 million Russians have never taken any kind of loan.
Foreign banks are keen to tap into this growing market and are snapping up medium and small-sized domestic banks.
This month, French financial group Société Générale, which had acquired a 20% stake in Rosbank, filed a request to exercise an option worth $1.7bn to take control of the Russia’s second largest retail bank. The deal is expected to be made at a record-high premium, with a price-to-equity ratio of 5.9.
Belgian bank KBC is set to pay $983m to acquire a 95% stake in second-tier mortgage bank Absolut Bank. The transaction is expected to close in the third quarter.
Other western banks building stakes in local banks include America’s Morgan Stanley, Austria’s Raiffeisen, Belgium’s Dexia, Germany’s Commerzbank, Nordic’s Nordea, Hungary’s OTP and Czech Republic’s PPF Group.
David Nangle, a banking analyst at Renaissance, said: “Following recent deals involving Raiffeisen, SG, OTP and some others, we firmly believe that the Russian banking market is now fair game for foreign bank investors, both from local banks’ willingness to allow foreign partners and international banks’ increasing appetite for Russian banking assets.”
President Vladimir Putin signed a law at the end of last year that put foreign investors on the same footing as Russians and allowed them to purchase of up to 20% in Russian banks without the approval of the central bank. Previously, foreign investors had to obtain regulatory approval for any level of ownership.
Of the multi-national finance companies, Citi is the most firmly established, having set up consumer banking in Russia in 2002. It serves more than 400,000 retail and 1,500 corporate clients from 60 local branches.
HSBC’s Russian subsidiary has received a licence to provide retail banking and is expected to have a limited network operating by the end of this year. HSBC chairman Stephen Green has said the sector in Russia is “crying out for good quality service from international competitors”.
Germany’s Deutsche Bank is considering adding consumer lending to its existing operations in corporate and investment banking and UK bank Barclays is due to open a Moscow office with 200 staff.
Rustam Botashev, a banking analyst at Aton, said he regarded Russia’s banking sector as the most attractive in the Commonwealth of Independent States because it has low levels of penetration, the country’s population is large and it has strong economic growth.
He said: “Untapped demand for retail banking services in Russia has attracted multi-national financial corporations to the country. These foreign banks are often in better positions than their Russian counterparts, thanks to cheap funding and strong expertise.”
Foreign ownership of Russian banks is set to rise from 12% to 18% by the end of this year, the Central Bank said. However, not all Russian banks are selling to foreign strategic investors.
The larger ones, including Troika, Alfa and MDM, are considering flotations, while recent IPOs by state-controlled Sberbank and VTB have increased the Russian banking industry’s capital by 25%.
The three state-controlled banks still have a strong hold over the market. Sberbank has a 50% share of retail deposits.
The remainder of the industry is highly fragmented said analysts. They say domestic banks would have to merge or be acquired by a larger company to fight off increased competition.
And, according to Aton, with the exception of VTB, most domestic banks face serious competition from foreign banks.
Its report said: “There are few Russian banks able to serve as a consolidator and therefore help the industry compete effectively against foreign institutions, which continue to strengthen their presence.
Russian banks lack access to cheap funding and have far less integration and retail banking expertise than their international counterparts.”
The insurance and asset management sectors have also attracted interest from foreign companies, although not to the same extent as retail banking.
In April, Germany’s Allianz took overall control of its insurance and fund management joint venture Rosno from its Russian partner Sistema.
Level of defaults causes concern
Unprecedented growth in the retail banking sector has highlighted some deficiencies. This month, US rating agency Fitch said a high degree fragmentation, high loan growth rates and a lack of regulation were sources of weakness in Russia’s financial industry.
James Watson, senior director in Fitch’s Institutions group, said: “Rapid growth of lending is a concern, although this is mitigated by moderate penetration and a supportive credit environment.
“Asset quality is generally sound, supported by the buoyant economy, but impairment is increasing in unsecured retail portfolios as loan books season.”
Russian independent agency RusRatings estimates that the total volume of overdue retail loans could be about 75.5bn roubles ($3bn), triple the 2006 figure.
Richard Hainsworth, chief executive of RusRatings, said some banks have been charging interest rates of more than 50% on consumer loans and this had led to a high number of defaults.
He said: “Russian banks advertise a nominal interest rate, as low as 10%, while effectively charging more than 50%. The remaining payments are for a wide variety of extra costs, such as a charge for opening the account, taking money from the account to pay for goods and insurance cover.”
Warning signs of a potential consumer credit bubble have been flagged in the Russian press.
Business daily newspaper Kommersant recently reported that Russian debtors were defaulting on approximately 35% of outstanding loans.
Yet Stephen Jennings, head of Renaissance Capital, which has its own consumer banking arm, said there was little to fear as credit penetration and household debt were low. He said: “I would be a thousand times more worried about debt in the good old USA than I would be in Russia.
“It’s an immature market, so that means you will have players who take on credit exposure that they don’t understand and that the market doesn’t understand.”
However, Jennings said only 4% or 5% of Renaissance’s debtors were defaulting on loans.
Belgium-Dutch group Fortis has a fund management alliance with KIT of St Petersburg and UniCredit subsidiary Pioneer Investments has announced its return to Russia after six years away.
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